MRO purchasing professionals: Price not as important as service
MRO buyers took a hard look at price during the recession, but it never became a deal breaker. And that's not likely to change as the economy recovers.
By Susan Avery -- Purchasing, 10/15/2009 2:00:00 AM
MRO purchasing is not all about price.
MRO buyers consider product availability, on-time delivery and other criteria as they select the suppliers that provide their companies with maintenance, repair and operations goods and services.
So say the MRO buyers interviewed recently by Purchasing when asked whether the role of price in the supplier selection decision and the way they measure supplier performance has changed during the recession, and if they are doing anything differently as the economy begins to recover.
During the recession, companies looked to purchasing operations to reduce spending on MRO goods and services. And MRO buyers found industrial distributors bringing competitive pricing strategies to the negotiation table, especially for long-term agreements. Buyers say they got some good deals. But, perhaps more important, buyers also continued to look to distributors for help reducing costs. Suppliers are responding with innovative ideas on inventory management, process improvements and product substitutions.
For MRO buyers, taking a strategic approach to sourcing goods and services is not new. Such an approach, they say, has seen them through the recession and will see them through the recovery as well.
During the supplier selection process, price is just one of the criteria MRO buyers consider. Some buyers weigh price as heavily as 60% of the supplier selection decision. For others, it's not that much, making up 30% or even less of the cost of doing business with suppliers. Still others say a competitive price—and quality—is a given. And, for others, it can be a differentiator, with all else being equal. Often, it depends on the commodity being sourced.
Nevertheless, because of the nature of MRO—those goods and services do help keep a company up and running—product availability and ontime delivery have roles that are equal to, if not more important than, price in the supplier selection decision.
"You can have the best price in the world but if you can't get the product it does not do you any good," says David E. Stockwell, MRO category manager and supervisor of MRO storerooms at Saint-Gobain Containers in Muncie, Ind. "It can end up costing a facility much more than the price of the item if it's not available, especially if not having the item causes downtime on a line or possibly shuts the factory. You are looking at tens of thousands of dollars in downtime."
Stockwell and the MRO team have recently finished contract negotiations with his company's MRO supply base. He negotiates three-year agreements based on total cost of ownership (TCO). "Price is one of the main drivers in our negotiations, but product availability and ontime delivery are right up there with it," he says.
For Ernie Hernandez, director, commodity materials, at Noranda Aluminum in Franklin, Tenn., requirements of the company's business units hold a lot of weight in the supplier selection process. Business requirements, which consist of assurance of supply and quality criteria, make up 25% of the supplier selection decision, he says. Service is 20%, cost (which includes price), 35% and innovation, 10%. That's for the first round of negotiations with suppliers. Once the sourcing team has narrowed down the field, it looks for supplier capability to hold costs in line.
"In the recession, the criteria have not changed," says Hernandez who has responsibility for both MRO and raw materials sourcing at Noranda Aluminum. "There is more pressure to spend less so we are looking to suppliers for more innovation, to come up with ideas we haven't. That has become more important." He won't be doing anything differently as the economy recovers. "We have permanently changed the way we do business," he says.
Sourcing events
Hernandez, like many MRO buyers, leads a cross-functional team of representatives of maintenance, manufacturing/operations, finance, management and others through the strategic sourcing process for MRO items. While team members often chide purchasing for being all about price, companies that use teams often end up with a better result, he says, because "everyone comes to the table with different perceptions and priorities."
Likewise, Volvo group non-automotive purchasing, in Greensboro, N.C., uses cross functional teams for 90% of its sourcing events, says Randy Clark, senior strategic buyer, MRO and packaging. When selecting MRO suppliers, he says, maintenance is most interested in service, how fast the supplier can deliver the part, where the supplier inventories the part and the freight time line. Manufacturing/operations is interested in reliability, who will make a repair in the middle of the night. Finance is interested in price. Management is interested in total cost of ownership. "Purchasing," he says, "wants to make everyone happy."
While MRO buyers once used reverse auctions as part of the sourcing process to negotiate price and other contract terms for MRO goods and services, today they are more likely to use more traditional RFx tools. "We use auctions when the marketplace warrants it," says Stockwell at Saint-Gobain. "But a supplier won't get a contract just because it won an auction."
In an auction, suppliers can see how they rank compared to their peers, which can spur them on to lower their price, he says, recalling one supplier that enters auctions with its lowest price, which it does not change throughout the course of the auction. The tactic worked for the supplier, he adds.
Clark at Volvo, says, "Suppliers are wise to purchasing's use of reverse auctions and they have a whole set of counter techniques." He hasn't used the tool lately.
Typically, these cross-functional teams send out RFPs (request for proposal) with a market basket to determine pricing of the MRO items they are interested in sourcing. The market basket is made up of items purchased most frequently by the organization over a set period of time, usually 2–3 years. MRO buyers use the tool because it is most effective for the large quantity of SKUs (stock keeping units) typically sourced by an organization. But there are drawbacks: For instance, the tool doesn't allow for new products or product substitutions, buyers say.
Supply chain costs
One tact that MRO buyers take when sourcing a large volume of items is to involve the distributor's supplier, or manufacturer, in the negotiation process. In these cases, the buyers often are negotiating price and other costs with the manufacturer. Buyers then will negotiate service fees or mark-up with distributors that will provide the items and other services. Discussions on innovation also often involve all three parties—purchasing, distributor and manufacturer.
Stockwell at Saint Gobain negotiates with manufacturers "to drive as much cost out of the supply chain as possible." He consolidates volume with a single manufacturer and negotiates for discounts or rebates. The approach works on such categories as power transmission products and electrical products, he says.
As in the supplier selection process, price has a place in the process MRO buyers use to measure supplier performance. In fact, some MRO buyers are measured on their ability to meet cost-reduction targets.
Eric Sandford, director of supply management at OmniSource Southeast in Spartanburg, S.C., says, "We need suppliers to be profitable yet highly competitive in their pricing and we benchmark them. We discuss the results in quarterly meetings with the suppliers. If they are not competitive, we ask them what we can do to help reduce their costs." But Sandford doesn't let price stand in the way of doing his job. "We in purchasing are after all a service organization."
Mike Filitti, senior buyer in strategic procurement and planning at Alliant Energy in Cedar Rapids, Iowa, doesn't want to diminish the role of pricing but, he says, performance of suppliers—especially MRO suppliers—is very important. "When suppliers don't deliver on time, or deliver goods that are damaged or not what the businesses ordered, we will hear about it. We formally measure on-time delivery, fill rate and shipping accuracy using an annual scorecard. If their performance is not acceptable, we could go to bi-annual or quarterly scorecards."
These metrics, which demonstrate improvements in internal processes, help Filitti and other MRO buyers keep costs in line. Other ways that industrial distributors help buyers better manage costs include vendor managed inventory (VMI) arrangements, product standardization and product substitution, use of electronic data interchange (EDI) and demand-management activities.
MRO buyers regularly track prices of the raw materials that go into the production of the MRO items they purchase, often using sources such as purchasingdata.com. They watch prices of metals, chemicals and energy.
This is especially important as companies begin to purchase MRO goods and services globally, says Clark at Volvo, who will ask suppliers to explain geographical discrepancies in price, which can occur with global sourcing.
At Saint Gobain, Stockwell and the MRO team track pricing trends, including consumer price indexes. He has recently taken on responsibility for consolidating the lubricants buy across the company's packaging business, which has plants in South America and Europe. He's also consolidating purchasing of coatings for the company's glass-making operation in the U.S.
While some MRO buyers say MRO suppliers do a good job at communicating news of price changes, others say there's some room for improvement. News of price adjustments is particularly important to purchasing operations that have set up electronic catalogs for requisitioners and for accuracy in inventory databases. Stockwell is one buyer who says that distributors do "a really good job at price. They are very competitive and know they have to be in the ballpark or they will be eliminated from the negotiating process," he says.
Clark at Volvo is skeptical. He asks suppliers who approach him with an increase to justify the change. "If we're asking for something that's driving the increase, we'd like to know about it so we can make changes that may prevent that from happening. Suppliers hold their cards very close to the vest. But it's usually logistics or inventory that's driving the price. We try to push back to indexes whenever we can to negate increases." Clark's success at this depends on the flexibility Volvo has with the particular supplier.
"I really believe MRO suppliers are working hard to be as cost competitive as they can within their marketplaces," says Sandford. "But they also need to look at MRO from the buyer's point of view. For example, they should review customer pricing and benchmark their competition because we're doing that on our side. They need to try to drive down costs and show support to the buyers. An example would be more creative inventory programs. They can't just drop off a shipment or sign a purchase order. They need to come to the plant and look at the technology and suggest improvements. They can look at product consolidation for customers."
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